Free debt advice good. Paid for debt solutions better? You decide.

I came across this article on Yahoo by Poppy Trowbridge of Sky News about fee-charging debt managers. I despaired! Yes, there has been a lot of past bad practice by debt management firms, but most debt solutions are now put in place by companies that take pains to put their customers at the heart of every aspect of their business. When will people’s perceptions catch up with the reality?

The piece contains a number of inaccuracies and some of the views expressed are capable of very different interpretations, which I hope to clarify here. Here goes…

Indebted people who try to get out of financial trouble by using the services of consolidation firms are seeing up to four fifths of the money they pay going on fees and charges rather than their debts.

Sadly, that may be occasionally true, but it is only rarely true at the moment, unlikely amongst the better debt management firms and impossible from April 1st (and that’s NOT an April fool) when our industry becomes regulated by the Financial Conduct Authority (FCA). The article goes on:

Over a quarter those who have employed debt management companies wind up seeking advice about bankruptcy, or entering into Individual Voluntary Arrangements, figures show.

That may be true – but to write it as if it’s a bad thing is misleading. Many people in debt find their situation changes for better or worse. A solution that is appropriate when advised may change later. A good debt management company will keep the situation under review and review as necessary. (oh, and these firms don’t do consolidation – or only, these days, very, very rarely).

IVAs guarantee debt write off – if you make all the payments

For those that have equity in property or have good grounds for believing their situation is going to improve in a year or two, debt management is often right. If the situation worsens then an Individual Voluntary Arrangement (IVA), which tends to last for only five years and guarantees interest freeze and debt write off (if completed – most are), is often appropriate. These days there are few financial limits on who can be provided an IVA.

Gillian Guy, Chief Executive of Citizen’s Advice, told Sky News:

The first step has to be a rule book, has to be regulation. There are certain practices that are not acceptable, cold calling is not acceptable, front-loading charging is not acceptable, and it is not acceptable that money does not go towards the debt the person intended.

Sigh. I’m just ploughing through the 600 plus pages of the FCA’s detailed rules on consumer credit. Combine that with FCA’s high level principles and Treating Customers’ Fairly outcomes and we are regulated to within an inch of our lives.

But, to some extent, that just formalises what has been true for years. That’s why the industry was able to agree a Debt Management Plan Protocol with government and creditors last year. That’s why the trade associations, like Debt Resolution Forum (DRF), have independent complaints committees. It’s why the industry has crated a qualification, the Certificate in Debt Resolution, that takes 210 hours study, has three exams and a 70% pass rate – and 70% of candidates pass first time.

I wonder if Ms Guy knows that, alongside her own organisation and Citizen’s Advice in Scotland, the only organisation that achieved the Money Advice Service’s Quality Framework for Debt Advice was fee-charging debt management association DRF?

I wonder if she remembers the super complaint Citizen’s Advice made to the OFT about cold calling. The OFT rejected Citizen’s Advice’s accusation that this was a common practice in debt management. They said:

It would appear that the majority of the unexpected marketing calls, emails and texts received by consumers are being made with consumers’ consent. This contact is not therefore regarded by businesses as being cold calling. In their responses to an OFT questionnaire issued to credit brokers and debt management businesses, most businesses told us that they do not use cold calling, but may instead use what they describe as ‘warm calling’. Such ‘warm calling’ involves contacting consumers who these businesses say have, at some stage, either directly given their consent for that business to contact the consumer, or the consumer has indirectly given consent by agreeing that another business can pass their details to a third party…

… At the present time, the OFT does not consider it appropriate to recommend that the Government considers legislation to ban cold or warm calling…

… The OFT (Office of Fair Trading) also notes that unexpected calls will not in themselves always cause consumer detriment. Indeed, some consumers who were unaware of the existence of a service may, for instance, benefit from an unexpected call even if they did not remember giving their consent to receiving it.

The Sky News’ correspondent’s article goes on to say:

Two million people a year approach Citizens Advice with money problems. Last year alone, it received more than 1,300 problem cases relating to debt management companies specifically.

So that would be 0.065% of the debt queries they get. I’m proud of that (these levels are borne out by statistics released by the Financial Ombudsman Service, where Debt Management doesn’t get a mention – because they don’t release stats where an area of complaint accounts for less than 1% of those they get).

It’s easy for Citizen’s Advice

Citizen’s Advice mostly provide debt advice and rarely provide debt solutions. They don’t take in money from the debtor and distribute it to creditors. They don’t review the client’s position and make adjustments. They don’t provide a robust friend when the client falls on even harder times. People in debt are often vulnerable. That vulnerability extends to ability to pay and a need for continuing support. That only comes relatively rarely from advice agencies.

Around 70% of the debt solutions in Britain are provided by fee-charging debt solutions companies. One in five of those in fee-charging plans considered, or were in, free plans and chose to pay instead.

A study of more than 4,000 people done by Yougov for Money Advice Service, says that a third of people seeking debt advice go to CAB. But, when it comes to reducing people’s debt, CAB came 8th out of ten. The groups in which fee-chargers were represented came second and third and (if you restricted analysis to those who reduced debt “a lot” Insolvency Practitioners, who do IVAs, came top.

Is Bankruptcy a bad solution?

The article assumes bankruptcy is a bad thing and appears to display a lack of knowledge of the market place:

But there is concern that more vulnerable people will be pushed nearer to bankruptcy if the regulator doesn’t act more quickly.

Is Bankruptcy bad? Not at all. It’s a solution that can be a “get out of jail free” card for indebted people, albeit a very drastic one that I’d rarely recommend to someone with property, for example. The problem with bankruptcy is these days it costs too much (around £700) and isn’t affordable for many.

Lack of knowledge? That may be a tad unfair, but bankruptcy figures have plummeted with the IVA being confirmed as the most popular personal insolvency procedures in England and Wales for, I think, 12 out of the last 13 quarters. For the last two, it’s exceeded 50%! I go into more detail about this in my last post, which you can read here.

Is free debt advice as effective as paid?

Free debt advice may not always be as useful as a paid for debt solution. Good advice is to be applauded – but demoralised, unconfident people in debt often need more. Specifically to poo-poo the IVA when it is affordable, achievable, represents the debtor’s best efforts, usually lasts half the time of a debt management plan and offers interest freezes (often worth thousands) as well as debt forgiveness… Well, that seems a little absurd.

Do you think Poppy Towbridge’s article is a true reflection of the industry? Or is it based on yesterday’s truths rather than today’s reality? Please share your comments below or tweet us @ClearDebt.

Comments:7

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There has been a lot of bad press over fee charging debt management firms over the past few years and a lot of what the sky news article came out with seems to be outdated information. Now that the debt industry is tightening up its act with the new FCA regualations – hopefully we will see an end to this bad press and the publics perception of the debt management industry will improve

I fear there will be some tough times and bad press for us to go through – we aren’t all shining lights and FCA will almost certainly have a few targets in their sights for early enforcement action – but it’s important that compliant companies that offer good service and trade associations like DRF stick together when this happens and robustly support the good work we do.

Andrew, as you know DebtWizard.com is free to the provider so I am effectively in that camp but feel the Sky news article you refer to was somewhat biased towards the free sector. I know what hard work you and other debt management firms have put in to achieve DMP Protocol and to continually raise the standards. So keep going, don’t give up because in the not too distant future that type of report will be lambasted as inaccurate, which too some extent it already is. It was based upon one case study with a firm (not named) so one must suspect it does not belong to a trade association. I feel that says it all. Mike

Thanks for your comments Mike, I really felt a sea change at an event I went to last week where there seemed a real willingness for free-to-client providers to work with fee-chargers and to look, for example, at two-way signposting. There is a real understanding now that fee and free deal with customers with quite different demographics.

It will take a long time for the industry to get over the mistakes made in the mid 2000s by a number of players that were chasing big bucks and frankly didn’t cair about their clients as human beings.

I haven’t been involved for years now, but I do remember the righteous indignation against the industry back then and how hard it was to convince skeptics that there were good guys in the DM and IVA industry that wanted to do it right by clients and also make a fair wage themselves.

Keep fighting the fight Andrew. Without teams like ClearDebt and orgs like DRF, the most vulnerable in society will be easy pray for the vultures in the consumer credit industry

Anecdote from a case last Monday. Leading UK debt advice charity advised Mr and Mrs D that they did not qualify for a DRO as their disposable income was £300 per month between them. They refused to help with bailiffs aggressively collecting Council Tax form a previous address for her, and insisted to him that he MUST repay his DMP (£2,000) within one year, as that was the priority. They also advised him that if his circumstances changed within 3 years then, even if they found someone willing to submit a DRO for them, then The Insolvency Service would revoke the order. Mr and Mrs D have 5 children, and are reliant solely on state benefits for income, including DLA, and have a significant negative disposable income when utilising the Common Financial Statement as a benchmark. I don’t know, perhaps they were using their own figures instead of the CFS. Anyway, all of this is on a recorded call, but the upshot is that with a fair following wind I should have them under the protection of a DRO each at some point towards the end of this week I reckon. Hopefully, this is an isolated incident of disgraceful advice through said organisation, but Hey Ho, at least it was free disgraceful advice and therefore is completely beyond reproach or criticism.

In my opinion free advice is much better than paid advice!!! I have found debtwave company in UK, they advice me on debt management and they didn’t charge any fee from me!!!! Thanks to Garry for the support.

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ClearDebt proposes and administers Individual Voluntary Arrangements (IVAs). We only provide advice on the basis that there is reasonable contemplation of an insolvency appointment, once it is apparent that an IVA is likely to be the most appropriate debt solution.